Rosneft Tops Exxon With 5% of World Oil in Soviet-Era Wells

OAO Rosneft (ROSN)’s $55 billion takeover
of TNK-BP creates an empire stretching from Russia’s Far East to
Venezuela that pumps almost 5 percent of the world’s crude.

As Chief Executive Officer Igor Sechin integrates Russia’s
largest and No. 3 oil companies, he will steer an upgrade of
Soviet-era refineries, a drilling program in uncharted Arctic
waters, the creation of a natural gas business and a global
alliance with Exxon Mobil Corp. (XOM)

The new company, created yesterday, will be about 70
percent-owned by the Russian state and will employ 218,000
people, more than Exxon and Royal Dutch Shell Plc (RDSA) combined.
Rosneft sales per employee will be $729,000 this year, compared
with more than $5 million at Shell, representing the scale of
potential cost savings. Sechin plans to find $10 billion of
efficiencies through the TNK-BP deal.

“This is the biggest acquisition in history in terms of
production and reserves,” said Daniel Yergin, author of “The
Prize,” a history of the oil industry, who will sit on an
integration committee overseeing the takeover. The companies
“recognize the scale and complexity, but they also see the
scale of opportunity.”

Ambitious Plans

Buying TNK-BP stretched Rosneft’s finances, racking up $31
billion in loans, and the company is funding part of the deal by
selling oil in advance for as much as $10 billion to Glencore
International Plc (GLEN) and Vitol SA, the world’s two biggest
independent oil traders. Moody’s Investors Service and Fitch
Rating Ltd. both put a negative watch on Rosneft’s credit after
they announced the deal.

“The plans are ambitious and capital-intensive,” said
Valery Nesterov, an oil and gas analyst at Sberbank Investment
Research in Moscow. “It will need to create a modern, advanced
company and not a traditional one that it is now.”

The spending includes investments in the upgrade of
refineries, estimated at $25 billion for Rosneft’s own plants,
as well as $2.5 billion for TNK-BP’s projects.

Sechin will also seek to accommodate the interests of BP
Plc (BP/), the U.K.’s second-largest oil company, which became
Rosneft’s second-biggest shareholder through the deal to sell
its half of TNK. BP will have a 19.8 percent holding in Rosneft
and CEO Bob Dudley will sit on the board.

‘Long-Term Relationship’

“The Russian oil industry has tremendous potential both
onshore and offshore,” Dudley said at a press conference in
London yesterday. “This is the beginning of a very long-term
relationship.”

BP will buy back $8 billion of shares from investors after
the deal, returning to its shareholders an amount equivalent to
the value of the original investment in TNK-BP in 2003, the
London-based producer said today.

As part of the deal, BP bought a further 5.7 percent stake
in Rosneft from state holding Rosneftegaz, which owned 75.16
percent of the Russian oil producer. The state’s stake in
Rosneft is now 69.5 percent.

Rosneft’s ambition isn’t limited to Russia, where billions
of barrels of crude remain untapped in Siberia’s Vankor field,
on the island of Sakhalin in the east and in Siberia’s Bazhenov
shale formation. Sechin has partnerships with Norway’s Statoil
SA and Italy’s Eni SpA (ENI) to explore offshore areas and so-called
tight oil fields.

Rosneft is also working with Exxon in the Gulf of Mexico,
Alaska and Canada. The company has operations in Kazakhstan,
Venezuela and the United Arab Emirates.

Soviet Spy

Sechin, a former Soviet spy and longtime Putin ally, said
March 6 that the TNK merger will create at least $10 billion in
cost savings, as well as giving Rosneft an additional $5 billion
in cash from TNK’s balance sheet. Many of TNK’s fields lay close
to Rosneft’s, creating economies of scale, he said.

Sechin has a track record of combining assets from other
companies. As a deputy prime minister in Putin’s government
responsible for energy policy, he built Russia’s largest oil
producer in part with the assets of bankrupt Yukos Oil Co.,
whose former chief executive Mikhail Khodorkovsky remains in
prison on tax charges.

“It’s a real challenge for Rosneft, primarily a management
one,” said Cliff Kupchan, a senior analyst at Eurasia Group in
New York. “Sechin will first have to focus on digesting TNK-BP
assets. Next, the key will be to prioritize effectively. Tight
oil and international partnerships offer relatively big and
near-term payoffs.”

With TNK-BP, Rosneft overtakes Exxon and PetroChina Co. (857) in
output. It will pump about 4.1 million barrels a day this year,
the company said. While it has replaced more reserves than it’s
produced every year since 2009, its market capitalization
remains a quarter of Exxon’s.

“The list of company issues will expand because there is a
simultaneous increase in the number of strategic goals and
ambitions happening along with the company enlargement,” said
Sberbank’s Nesterov.